Syneos Health Inc

F:8IN

Earnings Call Transcript 2021-Q2

[Operator]

Good morning and welcome to the Syneos Health Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I would like to hand the conference over to Ronnie Speight, Senior Vice President of Investor Relations. Please go ahead, sir.

[Ronnie Speight, Senior Vice President, Investor Relations]

Good morning, everyone. With me on the call today are Alistair Macdonald, our Chief Executive Officer; Jason Meggs, our Chief Financial Officer; Michelle Keefe, our President of Commercial Solutions; and Paul Colvin, our President of Clinical Solutions. In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.syneoshealth.com.

Remarks that we make about future expectations, plans, growth, anticipated financial results and prospects and our expectations regarding the COVID-19 pandemic constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995 and we disclaim any obligation to update them. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2020 and our other SEC filings.

During this call, we will discuss certain non-GAAP financial measures which exclude the effects of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be considered a supplement to and not a replacement for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the appendix of our presentation.

I would now like to turn the call over to Alistair Macdonald. Alistair?

[Alistair Macdonald, Chief Executive Officer]

Thanks, Ronnie. Good morning, everyone and thank you for joining us today. I hope you and your families are in good health. I am excited to share another strong quarter of results, which demonstrate that our differentiated product development strategy continues to resonate in the market. We exceeded the midpoint of our guidance across all financial metrics for the second quarter and our integrated product offerings powered strong awards and backlog growth for both segments, most importantly, both clinical and commercial revenue returned to robust year-over-year growth, the trend we expect to continue for the balance of 2021.

Now, for some key highlights from the quarter, first, overall net awards grew by 25.6% year-over-year, including clinical growth of 21.2% and commercial growth of 55.3%. This award strength drove second quarter book-to-bill quarter book-to-bill ratios of 1.45x for clinical solutions and 0.94x for commercial solutions resulting in robust TTM book-to-bill ratios of 1.37x for clinical and 1.14x for commercial. Second, we achieved strong profitability gains with 47.1% year-over-year adjusted EBITDA growth and a 190 basis point improvement in adjusted EBITDA margin compared to the second quarter of 2020. Thirdly, we continue to attract world class leadership talent and I am excited about the addition of Michael Brooks as our Chief Development Officer. Michael’s deep experience and connections in clinical development and commercialization will drive our go-to-market strategy, advance innovation and enhance the voice of the customer across the product development continuum to create better patient outcomes. Also at the Board level, we are enthusiastic about the recent addition of Dr. David Wilkes. As a champion for addressing disparities in healthcare, Dr. Wilkes shares our passion for positively impacting patients’ lives. We look forward to benefiting from his impressive industry experience and medical expertise.

Now, moving into further details on our results, we continue to recover from the impacts of COVID-19 as our total company sequential revenue growth strengthened and year-over-year revenue growth accelerated to 26.6% compared to the second quarter of 2020. Clinical Solutions revenue grew 31.1% compared to the second quarter of 2020 driven by accelerating startup of both non-COVID and COVID clinical projects and contributions from our 2020 acquisitions. Our clinical team also closed a record quarter of net awards that were fueled in part by continued strength in the SMID segment. These awards also included 3 large-scale FSP 360 wins, where we are replacing existing providers demonstrating the competitiveness, scale and flexibility of our solutions. Under our awards policy for FSP services, we only included 12 months of services in our bookings, even though each agreement represented an initial term of at least 3 years. The remainder provides further fuel for growth in addition to our reported backlog. Driven by these strong sales, record ending backlog that is up 21.5% and a robust pipeline of new opportunities, Clinical Solutions remains well-positioned for strong revenue growth in the second half of 2021 and beyond.

Our second quarter clinical awards also included several COVID-19 related projects, although this category, including treatment therapeutics, remained at less than 4% of our backlog at the end of the quarter. Given this limited backlog concentration of COVID studies, we expect our robust revenue growth in 2022 will be driven by the strength of our non-COVID backlog. Given growing customer demand for decentralized clinical trials, we continue to enhance the way we engage with sites, patients and physicians. Our decentralized trial solutions are designed to bring trials closer to the patient, reducing sign in patient burden while expanding participant diversity.

We recently launched two initiatives to foster improved engagement. First, we established a dedicated decentralized trials site advocacy group focused on new technology optimization to make trials more accessible while improving data capture along with participant diversity and retention. Second, we launched our Patient Voice Consortium, a cross-functional hub that integrates strategic patient perspectives throughout the product development lifecycle. We believe these efforts set the standard for best practices in incorporating patient insights into clinical trial design, communications, access initiatives and launch strategies.

We also continue to expand our dynamic assembly network of DCT data and technology providers in order to best serve our customers with the recent announcement of our relationship with Aetion. Aetion provides regulatory-grade data and analytics to produce real-world evidence on the safety, effectiveness and value of treatments for patients and other stakeholders. These initiatives, in combination with our Illingworth home health services represent significant inroads toward improving the patient experience and realizing our vision of shortening the distance from lab to life.

Turning now to Commercial Solutions, we saw accelerating sequential recovery and a return to year-over-year revenue growth of 13.2% compared to the second quarter of 2020. Year-over-year growth in our core business was even stronger, but was partially offset by the headwinds from the divestiture of our Medication Adherence business in the fourth quarter of 2020. All of our core commercial businesses posted a return to strong year-over-year growth. Deployment Solutions had another quarter of strong new team starts and the number of deployed resources reached a full year high. Consulting completed a very strong first half of the year and communications continues to see strength in the public relations and medical communications businesses. Importantly, full-service commercial gross awards, where we strategically combined these capabilities, have more than doubled on a year-to-date basis compared to 2020. This performance highlights the continued success of our integrated model, fueling growth across our commercial portfolio.

Additionally, several key factors are contributing to the ongoing diversification of our Deployment Solutions business, which we expect to improve the consistency of future commercial growth, including our ability to deliver sophisticated solutions, the continued evolution toward more targeted therapies and the strong biotech funding environment. These dynamics have supported the migration towards smaller average field team sizes, a lower concentration of sales-only routines and revenue and longer project durations.

Our commercial expertise also continues to fuel innovation across the product development continuum with dynamic engagement capabilities such as Kinetic, which seeks to optimize HCP engagement through a combination of face-to-face and virtual field team activities. Additionally, we are seeing increased adoption of the digital amplifier component of Kinetic by our clinical customers, where this capability is designed to accelerate patient engagement and enrollment by driving patient referrals by physicians into clinical trials. We believe this unique suite of capabilities differentiates Syneos Health and is a key factor in driving our strong new business awards.

Lastly, Syneos One, our innovative end-to-end product development methodology, continues to provide a competitive advantage across both segments. We are particularly excited about the Syneos One contribution to growing the pipeline of potential commercial awards and revenue with the first of many Syneos One portfolio assets set to begin commercialization in the third quarter. Although these assets have not featured prominently in awards or revenue to-date, we expect the Syneos One portfolio, along with our integrated full service commercial and innovative Kinetic capabilities, to position us well to capitalize further on strong market demand and drive robust commercial revenue growth over the long-term.

Before I turn the call over to Jason, I want to thank the entire Syneos Health community for their ongoing resilience, focus and collaboration as we work together to help our customers improve and accelerate the delivery of therapies that impacts health worldwide. Their continued commitment to collaboration, inclusive thinking and use of insights is helping build a superior culture to deliver high levels of innovation for our customers and their patients.

Jason will now provide additional comments on our financial performance and guidance. Jason?

[Jason Meggs, Chief Financial Officer]

Thank you, Alistair and good morning everyone. Our total revenue for the second quarter 2021 was $1.28 billion, up 26.6%, 23.6% in constant currency compared to the second quarter of 2020, which was significantly impacted by the COVID-19 pandemic. Our Clinical Solutions revenue for the second quarter was $991.1 million, up 31.1% or 27.5% in constant currency compared to the second quarter of 2020. These increases include increased startup activity across both our COVID and non-COVID projects, a 795 basis point contribution from acquisitions and a 240 basis point tailwind from the faster recovery in reimbursable expenses. This growth was partially offset by a headwind of 85 basis points from the 2020 divestiture of our contingent staffing business.

Our second quarter Commercial Solutions revenue was $291.5 million, up 13.2% or 12.2% in constant currency compared to the second quarter of 2020. This robust growth in commercial revenue was driven by broad double-digit expansion across our core commercial businesses, with particular strength in consulting and includes a 75 basis point tailwind from reimbursable expenses. This growth also includes the impact of the 250 basis point headwind from the 2020 divestiture of our Medication Adherence business.

Adjusted EBITDA increased 47.1% to $174.6 million, representing an adjusted EBITDA margin of 13.6%, an increase of 190 basis points compared to the second quarter of 2020. The increase in adjusted EBITDA margin for the second quarter was primarily the result of revenue growth and our ForwardBound program, including operating leverage. These benefits were partially offset by increased costs from the expiration of temporary savings programs instituted in 2020, a higher mix of reimbursable expenses, and the impact of foreign exchange.

Adjusted diluted EPS of $0.97 for the second quarter increased by 67.2% year-over-year primarily driven by an increase in adjusted EBITDA. Our operations generated $88.7 million in cash flow for the second quarter. Our year-to-date 2021 cash flow from operations has been very strong, reaching a record level of $215.8 million driven primarily by our net income as the impacts of the pandemic subside. DSO for the quarter was 40.3 days and our capital expenditures were $11.2 million. We ended the quarter with $260.9 million of unrestricted cash and total debt outstanding of $2.92 billion, resulting in net leverage of 3.8x.

During the quarter, we amended our credit agreement to increase Term Loan A by $495 million and used the proceeds to fully repay our outstanding Term Loan B in order to further reduce future interest expense. We also repurchased $73 million of our outstanding shares during the quarter in conjunction with the sales of the remaining ownership interest of our private equity sponsors. Our non-GAAP effective tax rate for the second quarter was 24% consistent with our expectations for the full year 2021.

Turning now to our 2021 guidance, this guidance contemplates our current view of the estimated impact of COVID-19 on our business, recognizing that factors related to COVID-19 are outside of the company’s control and subject to change. We now expect full year 2021 revenue in the range of $5.18 billion to $5.3 billion, representing growth of 17.3% to 20%, an increase of $15 million at the midpoint, primarily due to higher reimbursable expenses. This growth includes an estimated contribution from acquisitions of 540 to 580 basis points and a headwind from our 2020 divestitures of approximately 110 basis points, both of which are unchanged. We are narrowing our expected range of total adjusted EBITDA to $750 million to $780 million. This continues to reflect an adjusted EBITDA margin of 14.5% to 14.7%, up 30 basis points from 2020 at the midpoint, which now incorporates a higher mix of reimbursable expenses compared to our original expectations.

Lastly, we are increasing our expected adjusted diluted EPS to a range of $4.25 to $4.43 or a year-over-year growth of 24.6% to 29.9% primarily to reflect the impact of our second quarter share repurchases and lower interest expense. Our guidance incorporates interest expense of $84 million to $87 million, a non-GAAP effective tax rate of 24%, and an estimated diluted share count of 105.2 million shares. Further, we continue to expect our net cash outlay for income taxes to range from $50 million to $60 million.

Turning to our outlook for the third quarter, we expect year-over-year growth to moderate somewhat given the sequential recovery that began in the second half of 2020, but remains strong in both businesses. We expect third quarter revenue of $1.315 billion to $1.365 billion and total adjusted EBITDA of $195 million to $205 million. This reflects as reported revenue growth of 19.7% to 24.2% compared to the third quarter of 2020. It is important to note that this reflects an adjusted EBITDA margin of 14.9% at the midpoint, which is down from Q3 2020 due to the impact of our temporary cost-saving measures instituted in 2020 in response to the COVID-19 pandemic. However, we remain on track for achieving the full year expansion in adjusted EBITDA margin as reflected in our guidance. This revenue growth includes an estimated contribution of acquisitions of approximately 610 basis points and a headwind from our 2020 divestitures of approximately 80 basis points. This growth also includes an expected tailwind of approximately 375 basis points due to growth in reimbursable expenses.

This completes our prepared remarks. And we would be happy to answer any questions. Operator?

[Operator]

Thank you. [Operator Instructions] And our first question comes from David Windley with Jefferies. Your line is open.

[David Windley, Jefferies]

Hi, good morning. Thanks for taking my question. I wanted to focus on full-service commercial if I could. You mentioned, Alistair, in your remarks that the first one is slated to launch in the third quarter. That seems like that’s kind of stayed on time to your early expectations. Could you talk about how you think that will ramp and what amount of contribution that is making? And then also just so we can understand a little bit better how you have taken value from that into bookings? How do these types of deals begin to contribute to bookings or when do they? Thanks.

[Alistair Macdonald, Chief Executive Officer]

Yes, okay. Good question to start, Dave and a long one. So, good morning everybody and good morning to you, Dave. So, that launch is still on schedule. It’s still moving through. We are pleased with that. I think it’s probably easier to start with how we book them first and then go to the contributions from that work. So, we really booked those kind of almost as a combination of FSP and when the work goes to contract so that we don’t trigger any of the contingencies if it doesn’t get approved and that kind of thing. So we’ve taken the preplanning and team build work in terms of bookings for that. But bookings start to come through from those projects as the work kind of goes into the backlog really. So we almost take them when the contracts are signed. So that we – so we know where that work is coming through and the pacing of it, etcetera, etcetera. So those products that come through, the Syneos One channel or even through the full-service commercial channel, which is a growing element of Michelle’s work, the bookings and the start of that work are quite close together, so that we don’t get ahead of ourselves. We don’t artificially inflate the backlog, etcetera. If one of the contingencies, the product doesn’t get approved, the product will get funded, etcetera. If one of those things happen then it doesn’t trigger. So I think it’s a very conservative way to do it. I think it’s the best way to do it. It helps us to take out any of the kind of volatility that was an element of commercial previously. And helps us build a very robust backlog with that. Michelle, any additional comments on that?

[Michelle Keefe, President, Commercial Solutions]

Sure, David. Hi, David. So a couple of things. So one of the things that really helpful about full-service commercial awards along with the Syneos One pipeline that will continue to feed commercial in the upcoming years. is that we have good line of sight because we put a product development road map together of everything that the customer is going to be doing with us over time. And it has milestones that are tied to approvals, etcetera. So it gives us a very good view into the future of what potentially can drop into actual revenue quarter-by-quarter over the next 2 or 3 years. And as Alistair said, we take a, I think, a prudent approach in the fact that we booked the pre-revenue work. What we mean by pre-revenue was the pre-approval of work for the asset. And then once we know the product has been approved, we then would start taking things like deploying the sales forces, etcetera.

[Alistair Macdonald, Chief Executive Officer]

So in that case, David, we’ve taken that pre-approval work planning, market access strategy work kind of set up the management team, the build-out of the sales team. But as that team goes into the field, that’s when we will take more of it. So we pace it through quite conservatively, so more to come really on that launch in terms of bookings and then obviously, we can get into the billings side of it too.

[David Windley, Jefferies]

If I could follow-up with just one last on your 3Q, 4Q cadence suggests that I think 3Q is up a little bit, 4Q becomes a fairly steep inflection. I know you typically in commercial have some annual bonus payments that contribute to that, but if you could perhaps comment about other factors like cadence pass-throughs that might influence both the revenue progression and then the margin progression from 3Q to 4Q. Thanks.

[Jason Meggs, Chief Financial Officer]

Yes, Dave, it’s Jason here. So you’re right on the Deployment Solutions side. That certainly is featuring on the commercial side in terms of quarter four, continuing to sequentially ramp up. We also – we launched record teams last year. We’ve continued to launch a significant number of teams in each quarter and anticipate that continuing in Q3 and Q4, and you get those teams to scale as well as you progress throughout the year. And then we also have the normal seasonality in the communications and consulting side of the business where we see utilization max out really in quarter four. So that’s really what we see on the commercial side and the clinical side, continuing to see good site activations, continuing to see good enrollment of COVID and non-COVID. We continue to win COVID work. I think we’re up to 130 projects in clinical that are COVID related and have a good tail on that, frankly, into 2022, as I think you’ve heard from some of our other peers. Reimbursables are recovering. I don’t see – we mentioned in the prepared remarks that we have tailwinds from reimbursables. We’re having the guidance raised due to reimbursables, etcetera. So there is some of that as we look to the back half on the clinical side, as well as the commercial side. And then on the margins, right, you look back to prior years, even last year, our Q4 2020 margin was 17% plus, right? So that’s what we see on the growth of the business, utilization maxing out, contract modifications, the bonuses you mentioned, CPO, tax accruals coming back our way. From that perspective, it’s normal seasonality and in line and nothing from our perspective has really changed when you look at the second half relative to where we were.

[David Windley, Jefferies]

Okay, thank you.

[Alistair Macdonald, Chief Executive Officer]

Thanks, David.

[Operator]

Thank you. Our next question comes from Patrick Donnelly with Citi. Your line is open.

[Patrick Donnelly, Citi]

Great, thanks guys. Alistair, maybe one for you, I know last quarter, you talked about some large bookings that were being pushed out beyond your backlog window. Can you just talk about customer behavior this quarter relative to 1Q on that front? Just curious how things are trending with kind of the large bookings and clients are still pushing things out or are things being kind of acted on a little more near-term?

[Alistair Macdonald, Chief Executive Officer]

Yes, good question. I think we didn’t see any of that really in Q2. You naturally get things that move around the end of a quarter, but nothing out of the ordinary. And I think we’ve seen continued kind of return to what we’d expected – that we’d always expect to see kind of pre-COVID with the activity from SMID customers being very strong activity from large pharma customers being more normal, if you like, where decisions being made, projects coming through and getting into the clinic. So as you see, we had a great bookings quarter, very strong in clinical and commercial, very strong in Syneos One, very strong in full service commercial as well. So really we’re pretty pleased with all those sectors. We’ve got good, robust pipelines as we go into Q3 and very pleased with the demand environment that we’re sitting. And I think the innovation that we’re bringing to customers in terms of integrating products and selling, doing more cross-selling, etcetera, as well as the full end-to-end Syneos One button is in a really strong position.

[Patrick Donnelly, Citi]

Okay. That’s helpful. And then maybe just on the general recovery on things like site access and RFP flow. Jason, what do you see in there? And then what are you assuming also in kind of the back half in terms of continued normalization on that front?

[Alistair Macdonald, Chief Executive Officer]

Yes, I’ll do RFP flow. I mean, I think we are seeing a very robust environment from all sectors, both clinical, commercial, SMID and large in both sectors as well. So a good, healthy environment. And then, Paul, I think comments on the FSP.

[Paul Colvin, President, Clinical Solutions]

Yes. No, I think we continue to see really strong and it’s been – it’s really across all segments at this point and FSP and full service. So from my perspective, I think that’s going to continue on, especially as we’ve looked at our partnerships and as we look, continue to expand there. We’ve had this quarter a couple of new partnerships that we brought into the fold. We think those will continue to add volume as we go into the back half of this year and into ‘22.

[Alistair Macdonald, Chief Executive Officer]

Yes, and then Patrick, on the operational metrics. I mentioned the site activations continue to be well above pre-COVID levels, continue to grow enrollment, has really hit a strong point, and some of that, frankly, is driven by the COVID vaccine trial that we have. But underneath that, enrollment continues to move forward as well. So we’re encouraged by it. And I think as we talk about this internally, it’s more around how we accelerate trials and get caught up as best we can for the benefit of our customers versus we can’t quite get to the cycle and get study started and moving. So it’s – I think we have critical mass as well and can move these projects forward.

[Patrick Donnelly, Citi]

Great. Thanks guys.

[Operator]

Our next question comes from Tycho Peterson with JPMorgan. Your line is open.

[Tycho Peterson, JPMorgan]

Hi, thanks. Maybe a couple of follow-ups on the last line of questioning, can you quantify the COVID contribution in the quarter from a revenue perspective? I know you said it’s less than 4% of backlog. And then on site accessibility, last quarter, you said you’re above 70% of sites permitting physical visits. I’m just curious where that stands today. Where you think that could go in the back half of the year given the Delta variant. And how are you going to be leveraging gelling around remote monitoring. I think previously, you said about 25% of sites were up and running on that front, too?

[Alistair Macdonald, Chief Executive Officer]

Well, let’s start with Illingworth. I think we’re very pleased with Illingworth continued penetration into new categories, new projects and also within Syneos’ project. So it’s really a really enabling us to expand the footprint of our presence with sites, being able to get out and execute visits in the home rather than people having to come to site. And I think in Q2 operationally was a new record filling with in terms of the number of visits and that looking forward through the rest of the year and actually out into ‘22, we see that progression continuing to go. So I think that innovation around decentralization of trials is very important, not just for the execution of the remaining COVID balance trial work, if you like, but also new therapies where people are more reluctant to get out of the office. I think we had an example in Russia of an Illingworth visit to capture a patient for a rare disease trial or the patient lived 800 miles from the site. So for us being able to execute that in foreign land with a big gap between the site to capture that patient because I think without dealing with that patient would have been lost to us is a significant step forward. And I think that will continue in other trials. We continue to see sites being able to live with COVID and continue to enable patients to come in. I think what we saw through Q4, Q1 with sites working out local protocols, etcetera, has continued. The Delta variant, obviously, is a concern globally. We saw the impact it had in India we saw the impact it had in the UK in terms of COVID rates. But that in the countries with the high vaccination rates, if you look at the stats in the UK as the Delta variant went through, we really can see the chain has been broken between infection and hospitalization and death. So lots of sites continuing to open up, continuing to ramp up so new studies being placed, new sites – it’s a good sign for us as we continue to go through the rest of the year.

[Jason Meggs, Chief Financial Officer]

Yes, hey, Tycho, it’s Jason. On the COVID contribution right, it was – we talked about being less than 4% of backlog, I think when you look at quarter two it was a bit higher and that is a percentage, but both COVID and non-COVID are growing in the way that I would think about it as consistent with how we talked about it in quarter one which is when you look at the full year total company revenue that revenue contribution is going to be broadly in line with that backlog percentage. So that’s kind of how I would think about it.

[Tycho Peterson, JPMorgan]

Okay. That’s helpful. Alastair, you called out the three large-scale FSP 360 wins. I’m just curious if you could kind of put this in context and how is momentum building in that side of the business. Are you seeing kind of larger orders come your way here? You mentioned these are kind of multiyear deals to you’re only putting 12 months into the backlog?

[Alistair Macdonald, Chief Executive Officer]

Yes, absolutely. We’re very pleased with that. I mean, for us to play in the large pharma sector, you have to be very capable in FSP, not just in a function, but globally. So scale-wise, three pretty big awards, two of them with brand new customers, in terms of our FSP sector and replacing or displacing previous incumbents. So, very pleased with that, very pleased with the penetration there, and it’s something that we need as we continue to grow in our large pharma sector to as a kind of a deployment methodology for us to be able to take share. So, very pleased with that, long-term deals. I think all of them are at least 3 years, some of them have a longer time frame on them than that and across clinical, data services, etcetera, so in multiple different areas.

[Tycho Peterson, JPMorgan]

Great. One last one on commercial, you obviously had the benefit of easy comps. They are still relatively easy in the next couple of quarters. But I know you said the recovery was pretty widespread. So as you get past the easy comps, do you feel like you’re still on the kind of the recovery path here on commercial?

[Alistair Macdonald, Chief Executive Officer]

Yes, absolutely. Excuse me, yes, absolutely, we do. I think that – So a lot of the strategic work that we’ve been doing over the past several years is really now starting to come home to roost for us in commercial with cross-selling, cross from clinical. We’ve really integrated clinical and commercial across several platforms, including Kinetic. We still – we continue to see the growth of Kinetic digital amplifier, a lot of those innovations that we’ve worked to deliver for customers in terms of patient engagement, enrollment, patient support in the commercial side of the business. The contributions from Syneos One, most of that work was won when the products are in clinical phase. We got our first launch this quarter, we’ve got several lined up as we’ve shared with you all before at investor conferences, etcetera. And also commercial itself, a much stronger team, a much more focused and dynamic team. The BD team that we built 3 years ago is fully operational. It understands the model of how we sell and has really helped us to build and sell integrated packages in line with what customers are looking for. So I think all of those things are now starting to come home to roost. And I think that’s shown in the recovery of commercial, shown in how we look at commercial going forward as a much stronger entity and a much more significant contribution to the way that we win, not just in commercial itself but also in clinical.

[Tycho Peterson, JPMorgan]

Okay, thank you.

[Alistair Macdonald, Chief Executive Officer]

Thank you, Tycho.

[Operator]

Thank you. Our next question comes from John C. Kreger with William Blair. Your line is open.

[John Kreger, William Blair]

Hi, guys. Thanks. Maybe one follow-up to Tycho’s question, Jason, can you give us a sense about how COVID awards figured into your Q2 bookings total?

[Jason Meggs, Chief Financial Officer]

Hey, John, so it’s broadly in line with the percentage of backlog. A little bit higher, but nothing material. But the good news is that work continues, the awards continue, the pipeline flow continues. And as you look to ‘22, right, as I mentioned, it’s not some massive headwind, right, which could have been if we were to believe everything we thought at the beginning of COVID. So that’s where it was, and that’s how we see it playing out for the rest of the year and into ‘22.

[John Kreger, William Blair]

Great, thanks. And then a few questions relating to margin, one, we’ve heard a lot about labor shortages. Can you just talk about how that’s impacting you guys, if at all, and how you’re adjusting to it? And then, Alistair, given those larger FSP awards, I tend to think of those as being a little bit less profitable. Should we assume it that way? And does that impact your thoughts about sort of margin progression over the next year?

[Alistair Macdonald, Chief Executive Officer]

Well, yes, let me start with the demand environment – well, the resource environment. So yes, that, I think it’s easy to see that with the demand going through the CROs at the moment, the recovery of COVID, COVID trials, recovery of work and the work that got pushed to the right coming through that there is high demand in the sector. We see that as well. We are being, I think, very successful in bringing people into the organization. We have had people who have left has gone to competitors and come back in their droves. And I think that bodes very well for us and bodes well for our culture that we are a good organization to work for and people like to work here in this environment. We do the right things and we take care of our people. And as a people organization, that’s very important. But yes, there is heavy demand is in the usual areas, high demand in oncology, there is high demand in FSP. I think as large pharma places a lot of that work out with CROs, that demand is there. So yes, it’s a high demand environment. We are doing well in it. I think we are net gainers in that, and we are able to attract the talent that we want, where we want it at the right time. And there is always pressure with that. But we have a great team in talent acquisition that’s doing a great job. So, really pleased with where we are heading in that direction. That demand environment as well is global. I think in the early days, it was really an U.S. phenomenon as people can move positions in the U.S. a little bit more easily than Europe, but we have seen it in Europe and Asia as well. And we continue to be successful in that and bringing the right level of people.

[Jason Meggs, Chief Financial Officer]

Yes, and John, on the margin side, as it relates to growing headcount, etcetera, there are incremental costs there. I don’t see it as any different than any other year in terms of the scale of that. We are always adding heads. We are always competing. We do have price escalation clauses in our contracts each year where we increase rates and things of that nature. We have some businesses where we actually can increase prices based on this given the demand environment. And then we have other opportunities for efficiencies via forward bound and just looking at the organization to help offset this, anything that we might see that is unusually high. But we are just not seeing too much of that. And on the FSP versus full service, and we have talked a little bit about this in the past, a lot of the FSP work comes without the reimbursable load that a full service does. So, when you get down to total EBITDA, just the same as between clinical and commercial and the different businesses, we just need to grow them all and feel like we can continue to show that margin accretion over time that we have talked about in the past of to 50 basis points year margin accretion.

[Alistair Macdonald, Chief Executive Officer]

Let me add to that FSP piece as well. So, a lot of these – a lot of the FSPs that we win, we end up delivering more hybrids as well on top. So, once you get through the door with an FSP, you tend to get asked in, you become a preferred provider, etcetera, you get – you tend to get asked in to bid on the full service work, which comes with that – with our usual margins, but as Jason says, with the pass-through load as well. So, we want to get into these accounts, deliver whether it’s FSP, FSO, commercial, etcetera, we have multiple entry points and kind of do the traditional land and expand from that.

[John Kreger, William Blair]

It sounds good. Thanks guys.

[Alistair Macdonald, Chief Executive Officer]

Thanks John.

[Operator]

Thank you. Our next question comes from Donald Hooker with KeyBanc Capital Markets. Your line is open.

[Donald Hooker, KeyBanc Capital Markets]

Great. I was intrigued by the comments around the pharma sales force. I know you guys have been talking about this for a while now, but I just wanted to hear maybe an update here. You are saying the sales teams across the pharma industry have sort of gotten, smaller, which makes sense, more digital. In your view, has – are we at a new normal now? Has the industry fully adapted to this or are there sort of – are we going to still see this being a continuing trend going forward post-COVID?

[Alistair Macdonald, Chief Executive Officer]

Yes. I think there are two trends in there, actually, and I will get Michelle to comment as well. So, I think the trend of sales teams generally getting smaller is the norm now. There are one or two big ones out there that come through, but the norm is more specialty, more hybrid, more digitally enabled. But the second trend, I think, is that shift to digital that is still going. We have still got some ways to go on that. So, we are seeing our platform, the Kinetic platform, being used more and more by customers to provide that hybridized digital support, that omnichannel kind of support to HCPs by the field teams. And that’s great for us. We have got great technology. We know how to use it. We have seen better sales results for our customers by using it. I don’t think that’s a great enhancement. And obviously, if we can sell more product to customers, that’s a great return to them as well. We can cover more ground with less reps. So, the rep numbers don’t need to expand as much for us to drive that incremental revenue and help customers get out there and get their product in the right place at the right time. So, I think there are the two kind of subtle trends within it. Like Jason said, I think we have launched more teams in 2020, and I think we are on target to do that again in 2021, so continuing to have a drop on model. Michelle?

[Michelle Keefe, President, Commercial Solutions]

Yes, I will add one thing, I will just comment around deployed more resources in the last 4 years, the record number is important to note those are deployed resources those are a variety of resources and those are sales are presented and they are not educators. There is a growing trend and that’s fair so they are MSO, we embarked in specialists patient needs and those types of things. So – and the teams are much more integrated, right. You see digitally enabled cells and nurses and sales representatives and managed care folks and reimbursement specialists working on integrated team. And so that’s really, I think, a very important distinction around the diversification of what’s going on with deployment solutions.

[Donald Hooker, KeyBanc Capital Markets]

Okay. Maybe just a follow-up on your comments there. Thank you for that. So, it seems like – I think Alistair from what you said is we are going to – if I ask you the same question next quarter, you are probably going to give me the same answer. It sounds like this sales teams are getting smaller and smaller. They will continue to get smaller and smaller in the coming quarters. So, it’s not like there was one big change in the industry. This is an ongoing trend. Is that a fair interpretation of what you said?

[Alistair Macdonald, Chief Executive Officer]

I think the infield team gets smaller. So, you end up with less kind of dedicated sales reps, but the whole team, because we are delivering on a hybrid, you have got the call centers, you have got the team working on the Kinetic platform, supporting that as well as delivering it. You have got the omnichannel pieces of that. So yes, if you had a traditional team out in the field of, I don’t know, 100 people, you might have now 50 that are out in the field, really interacting with the docs direct with healthcare providers directly. But you have got a bigger proportion sitting behind that in terms of analysts. We are doing a lot of data crunching in that that we didn’t use to do to support that to build the insights so that we can look at, well, who should be prescribing this, who is, how do we get – how do we optimize different sites that have a different pattern and show different patents in their data and information. So, you have got a data science team that’s working on that now. You have got call center. You have got the people producing the digital materials, etcetera, and supporting and the training. So, it’s a more complex delivery. Yes, the sales team in the field is reduced in terms of the number of heads because they cover more ground digitally than they did driving around in their car. But you have got more revenue coming through in different channels, more digital channels, more kind of digital enablement channels. And I think that’s a really promising trend for us for the commercial in general, but also for Syneos because we are the market leader in that capability, and we continue to roll out new innovations that Pharma A doesn’t have for themselves. It makes it a little bit stickier in terms of being able to deliver not just a rep in a territory, but a rep in a territory with the right tools, with the right technology. And that technology is difficult to replicate and the delivery of it is difficult to replicate. And I think that bodes very well for us.

[Michelle Keefe, President, Commercial Solutions]

One last add-on is a lot of this is due to the complexity of the products that are getting approved, right. So, you are not getting like your fifth inhaler and respiratory going on the market, right, where you have to have a – it’s an arms race anymore. These products are highly specialized as you look at the products that are in the pipeline, they are orphan rare disease, they are oncology, they are cell and gene therapy, they are much more complicated delivery systems. And so the types of teams to support them have to kind of align to the capability that’s trying to deliver ultimately to a patient. So, there is also just a need based on what the pipelines are looking like is also driving that sizing.

[Donald Hooker, KeyBanc Capital Markets]

Interesting. Thank you. Thank you so much for the commentary.

[Operator]

Thank you. Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.

[Elizabeth Anderson, Evercore ISI]

Hi guys. Thanks so much for the question and congrats on this next quarter. I was doing if you could provide just a little bit more breakdown on the revenue between – in the third quarter in terms of how you are thinking about it between clinical and commercial? And then also, I was just wondering if you could help us break out some of the numbers that you said regarding pass-throughs and acquisitions and divestitures, just so that all of those things are clear between clinical and commercial?

[Jason Meggs, Chief Financial Officer]

Okay. Hi Elizabeth, on the M&A activity might be better just to do that offline. But on the different sequential increases in the businesses between clinical and commercial for the quarter, rather, look, excited about both of the businesses as they continue to come in recovery, and we continue to win a lot of work and grow the backlog. Commercial, particularly is just establishing a lot of momentum right now coming out of quarter two, 1.14 book-to-bill, almost 18% backlog growth, record team launches last year and continue to see that with Syneos One launches coming up. So, when you look at on a normalized organic basis, looking at quarter three and quarter four, right, we are high-teens carrying 20% growth in the commercial business, which is really great to see. And I think Alistair shared a little bit about how we are thinking about that longer term as well post just COVID recovery. Clinical side, really seeing good performance there as well as COVID continues to recover. We talked a little bit about the COVID trials and how they are standing up the vaccine trial that will continue into the back half. Although we did peak as we thought we would likely in quarter two on those COVID trials or the vaccine trials. But the other large relationships we have are continuing to stand up and the projects are growing. We are trying to catch those up as best we can from COVID. We had great SMID performance in sales in quarter four and quarter one, again, in quarter two. That’s starting to pull through into revenue as well in the back half. And so looking at growth there in the low to mid-20s, right, when you look at the clinical growth. So, that’s how we are looking at it by segment, really pleased with it. And we – if you look back at our guidance on the clinical side coming in December at our Investor Day and then where we have been thus far we have been in low-20% growth at that time and what you have seen in of really stick to that. And I think as others in the industry has seen their COVID backlog and their other projects unfold, I think they are catching up to where we were over the year, some are going higher with their COVID awards and backlog burn pulling through. But we are really pleased just that we have been able to put that out there and go hit it.

[Elizabeth Anderson, Evercore ISI]

Thanks. That’s helpful.

[Operator]

Thank you. And we have a question from Katie Tryhane with Credit Suisse. Your line is open.

[Katie Tryhane, Credit Suisse]

Hi. Thanks for taking my question. So, outside of the three larger FSP 360 awards, I mean, can you speak to the nature of the clinical net awards in the quarter in terms of what you saw from maybe a therapeutic in our customer perspective? Is there anything surprising or unusual to call out other than those three larger awards? Thanks.

[Alistair Macdonald, Chief Executive Officer]

Hi Katie, it’s Alastair. Not really. I think a pretty well-balanced quarter. We got a low distant in the SMID. We are the leader in the SMID sector. So, we expect that, but I think that’s particularly strong for us this time. Good FSP awards, as we mentioned, like you say, and a good contribution from large pharma. I don’t think therapeutically, there was any kind of bias in it. Paul is shaking his head, so I think that’s right. But yes, a pretty balanced quarter the business – therapeutic units, all firing their guns and FSP winning and winning in the SMID, using Kinetic to differentiate ourselves in clinical as well as commercial and cross-selling into commercial. So yes, pretty pleased with how well balanced it is. And that also helps. I think I can’t remember who asked the question about resources, but when you win a balanced workload like that, it really helps to – enables us to deploy the resources in a more balanced way, and we are not skewing towards oncology or somewhere else, which kind of creates a pinch point for resources by therapy. So yes, pretty pleased with how well balanced it was actually. And I think the pipeline looks that way still as well. It’s a well-balanced pipeline, not just therapeutically, but also globally.

[Katie Tryhane, Credit Suisse]

Okay, great, that’s helpful. And then in terms of – I mean, we saw a lot of deal activity earlier this year. Are you seeing any opportunities in the marketplace, or can you provide an update on what you are seeing shakeout in terms of committed competitive landscape standpoint? Thanks.

[Alistair Macdonald, Chief Executive Officer]

From an M&A perspective, I think you mean, Katie, yes?

[Katie Tryhane, Credit Suisse]

Yes or what you are seeing in terms of with all the deal activity with some of the CROs earlier in the year. I mean, how is that impacting how you are competing out in the field? Are you seeing any opportunities to capitalize on?

[Alistair Macdonald, Chief Executive Officer]

Yes, absolutely. I think one of those FSP wins could be a repercussion of some of our M&A activity. So, I think our stability, our scale – the fact that we are growing pretty well, being able to – we have become an employee that people want to come and work for. And that really helps because I think when you hire talent, like that into an organization like ours that gives you opportunities to go back into customers where those people work before. So, we are pretty pleased with that. But yes, I think that’s creating opportunity. There is plenty of activity still going on in the M&A landscape, a lot of organizations that are coming up that we get to see the books of, etcetera, a lot of commercial assets actually as well that are changing hands, and we are excited about that. It looks like people value that commercial capability in the private sector, and we are seeing a lot of interest in that. So yes, we continue to be opportunistic around that. We continue to use our capabilities to bring in the right people, and we will continue to do so.

[Katie Tryhane, Credit Suisse]

Okay, great. Thanks.

[Operator]

Thank you. And I am showing no further questions in the queue. I would like to turn the call back to Alistair Macdonald for closing remarks.

[Alistair Macdonald, Chief Executive Officer]

Thank you. So again, thank you, and sincere thanks go to the entire Syneos Health team for all they continue to do to manage through challenging circumstances while delivering for our customers. We remain very confident in our market positioning and look forward to continued strong growth and profitability in the second half of 2021 as the recovery from COVID-19 continues. Thank you for your attendance today and for your interest and investment in Syneos Health. Please be safe. Have a great day, and be good. Thank you.

[Operator]

This concludes today’s conference call. Thank you for participating. You may now disconnect.